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By Arghyadeep Dutta, 3:30 pm ET:
Companies around the world are set to expand their business after being as economies starting to recover from the pandemic, with firms beginning to earn higher profits and see substantial amounts of cashflows.
It is estimated that the cumulative capital expenditure of 4100 global non-financial firms, with at least $1 billion of market value, will grow 10% this year, the most in a decade, Reuters reported citing an analysis of Refinitiv data.
Analysts expect inexpensive debt, governments' infrastructure spending, and a global move towards green energy will help boost the corporate capital expenditure this year.
Corporate capex is on an accelerating path this year, given the strong rebound in corporate profitability, where profits have tended to lead capex pretty consistently, Mislav Matejka, head of global and European equity strategy at JP Morgan, said in a note.
Further, bank lending standards are continuing to improve, which helps capex decisions, he said.
Reuters reported the combined free cash flow of the companies rose to a decade high of $331.96 billion in the first quarter of this year.
Earlier, for the past few years, companies have chosen to buyback shares and debt repayment with their cash piles rather than investing in capex due to the U.S.-China trade war and the COVID-19 crisis.
However, Anik Sen, global head of equities for PineBridge Investments, told Reuters that companies would likely spend more heavily on capex this year.
Historically, capex was not rewarded with a higher share price due to the long payback periods, he said.
(But) the nature of capex today, such as automation, digitalization, shift to cloud, have significantly shorter payback periods with high internal rate of returns which flow through to higher cashflow expectations in the mid-term.
The analysis by Reuters showed European corporations are expected to see a capex increase of 13%, the highest among all, while compared with an 11% increase for U.S. firms and 9.7% for the Asia Pacific region.
By sector, technology companies are estimated to raise their capex by 17.4%. In comparison, consumer discretionary firms and utility sector firms are set to see a 17.3% and 13.8% increase, respectively.
Earlier this year, computer processor maker Intel Corp announced to spend $20 billion to expand its advanced chip manufacturing capacity.
On the other hand, the Japanese multinational conglomerate Sony Group said it would spend about $18 billion on strategic investments over the next three years.
The report mentioned that the developing markets may holdup on capex growth this year as most of them are still struggling with vaccinations and have higher corporate debt levels.
However, the emerging markets may post an 8% capex growth this year.
Very clearly, capex in the emerging world will not grow as fast as there will be credit constraints, the more so when the Fed starts tapering, Alicia Garcia Herrero, Asia-Pacific chief economist at Natixis, told Reuters.
The report mentioned that analysts expect corporations to allocate more money to renewable energy projects after facing pressure from governments and investors to turn carbon neutral in the coming years.
Companies are under the scrutiny of investors to show progress on their greenhouse gas intensity, Sen told. Asset managers, in turn, are being held to account by asset owners to engage with companies on ESG issues.
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